Jun 8, 2007

Some Thoughts on Credit Card Debt

Many years ago I was a young and ambitious person with a decent-paying job and a bright future. I also began to apply for and receive credit cards to expand my financial horizons.

These were the 1980s, though, and credit cards were a bit more difficult to get than today, when the companies are already sending my high school-aged teens applications. Still, as I began adding credit card debt, it became increasingly more difficult to get a mortgage (again, this was the 1980s, before the birth of the sub-prime lending market and 15-20% mortgages).

Within a few years I had purchased two new automobiles, and by 1987 my wife and I had accumulated over $20,000 in consumer debt. Banks looked at us with a wary eye when we started applying for mortgages, and the first two homes we purchased we had to go on land contract.

One of the smarter things we did as newlyweds was to seek a bill consolidation loan at a credit union. This allowed us to get a large chunk of our consumer debt down to a more reasonable 8-9% interest rate. Without this credit card debt consolidation, we would not have been able to qualify for the perks associated with good credit, such as low mortgage rates and ease of loan approval.

Ultimately, though, the best form of debt relief is self-discipline. The decision that ultimately improved our situation was a simple one: I physically cut all of our credit cards with the exception of one low-limit Visa, in case of emergencies, and we kept this card hidden away.

In addition, we began to pay small amounts over and above the minimum balance to whittle away at the principal. This type of debt management is good advice, but many consumers stay in the habit of paying the minimum each month, and never seem to get out from under their heavy debt loads.

It is useful to seek debt help from a reputable credit counseling firm, but ultimately the best help comes from within. I know this is anathema in an era of consumer binging, but living within one's means is more than a virtue: it's good financial advice.


MP said...

Thanks for the advice, Mike. I am in law school at the moment and face a mountain of debt coming out, mainly in student loans, but in credit cards as well (though not as mountainous).

Unfortunately, my current vehicle, a 2004 V6 Ford Ranger, is hurting me immensely in gas mileage. I really do need a new fuel efficient vehicle, but I too am afraid of the wary eyes of banks when I apply for a mortgage, were I to purchase a new vehicle.

What is a guy to do? I guess I should start looking at 2006 and 2007 models.

Hooda Thunkit said...

One does not truly understand credit fully until one crashes and burns under the weight of one's own cavalier spending habits.

Then comes the new-found sobriety of what one wants and what one needs.

(I've got the T-shirt, the bumper sticker, and a souvenir photo.)

BTW, that was NOT an enjoyable ride.

Tyson said...

Consumer debt is the plague of the XX century and it looks like it is here to stay. Here is another article on credit card debt.

smart guy said...

Banks keep issuing credit cards for people with bad credit like crazy. And people are so immature they apply for these cards and get even more in debt instead of using these cards to re-build credit.